Return Trends At Kung Long Batteries IndustrialLtd (TPE:1537) Aren't Appealing

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, while the ROCE is currently high for Kung Long Batteries IndustrialLtd (TPE:1537), we aren't jumping out of our chairs because returns are decreasing.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Kung Long Batteries IndustrialLtd, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.27 = NT$1.2b ÷ (NT$5.4b - NT$1.0b) (Based on the trailing twelve months to December 2020).

Therefore, Kung Long Batteries IndustrialLtd has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Electrical industry average of 7.7%.

Check out our latest analysis for Kung Long Batteries IndustrialLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Kung Long Batteries IndustrialLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Kung Long Batteries IndustrialLtd's ROCE Trending?

There hasn't been much to report for Kung Long Batteries IndustrialLtd's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward.

The Key Takeaway

Although is allocating it's capital efficiently to generate impressive returns, it isn't compounding its base of capital, which is what we'd see from a multi-bagger. Although the market must be expecting these trends to improve because the stock has gained 53% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Kung Long Batteries IndustrialLtd, we've discovered 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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